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Todd Benjamin's blog

This blog has now become our Business 360 blog, where Todd Benjamin continues to provide regular updates on the day's big stories, with contributions from our global network of business correspondents.

I've been accused by some of you of being too pessimistic, of having a dark cloud hanging over me, when talking about the economy and the credit crunch. But I don't make up the data, I just report and interpret it. I have been bearish and I continue to be bearish.

Call me Mr. Doom and Gloom, but if you want to call me that, then you better start thinking about names for the Fed and the IMF, because they too are speaking in dark tones.

The Fed now says its staffers expect the U.S. economy to shrink in the first half of the year. And some members of the Fed are now worried about the possibility of a "severe and protracted down" that could last into next year.

That's an even darker assesment than what Fed chairman Ben Bernanke painted publicly just last week during a congressional hearing. He admitted that a recession is possible, but suggested that by next year things would be looking much better.

Meanwhile, the International Monetary Fund is warning that losses from financial crisis could approach a trillion dollars. More than half of that would be suffered by the banks, with insurance companies, hedge funds, pension funds and others shouldering the rest.

"It is now clear that the current turmoil is more than simply a liquidity event, reflecting deep-seated balance sheet fragilities and weak capital bases, which means its effects are likely to be broader, deeper and more protracted," according to the IMF.

Just a reminder, those are the words of the IMF, not me. But I couldn't agree more. That's not being pessimistic, just realistic.

A lot of focus on the problems in the U.S. housing market. But conditions are tightening in the UK housing market.

The number of mortgage products has fallen by nearly 40 percent in the past month. The Bank of England has cut rates twice and is expected to move again this week.

But because of the credit crunch, mortgage rates on average are higher than they were last August. Tougher lending conditions, tighter money means the number of mortgage approvals is nearly 40 percent lower than it was at the same time a year ago.

Nationwide, a big mortgage lender in the UK, is forecasting a drop in house prices this year. It says house price growth is now at its slowest level for 12 years.

Property is an obsession with the British. There are prime time television programs devoted to it. And at the other end of the spectrum, plenty of articles in recent years about how difficult it is for first time buyers to get on the property ladder because of the run-up in prices.

Since 1988, house prices have risen more than 300 percent, about twice the rate of the United States.

Are UK house prices about to crash? Some predict they will, but I don't think so. Will they slow further? Absolutely. For those priced out of the market it couldn't happen soon enough.

In the last housing bubble, prices in the UK averaged five times earnings. This time around, it's closer to six times earnings. One analysis suggests prices have come down some 10 percent from the peak.

But there's still a disconnect between sellers who are still holding out for prices achieved earlier last year and buyers who are more cautious about the market.

That alone means there's further scope for prices to fall, as the reality of a softer housing market will force more sellers to face up to reality.

More signs of weakness in the U.S. economy. Jobs fell by a worse-than-expected 80,000 in March. The third month in a row that payrolls have shrunk.

But it's not surprising, given that we're in economic downturn. Add to that a strike by one of General Motors' suppliers. It's meant no work for almost half of GM's North American workforce.

The continued fallout from the subprime crisis also means fewer jobs. And the housing crunch means fewer new homes are being built. Add it all, including consumers retrenching, and it's easy to see why there's less demand for workers.

You have to go back to to start of the Iraq war in 2003 to find another period when there were three consecutive months of declining employment.

Initial claims for jobless benefits are now at their highest level since the aftermath of Hurricane Katrina in September of 2005. The unemployment rate, now at 5.1 percent, is expected to rise further.

"With layoffs rising quite quickly, and hiring intentions very depressed, we think the unemployment rate is set to reach 6% or so by the end of the this year," according to Ian Shepherdson, the highly respected U.S. economist.

He goes on to predict: "It will continue to rise, though hopefully at a slower rate, through 2009 if we are right in our view that the consumer retrenchment will last much longer than most forecasters expect."

Not comforting words. As I've said many times before, we didn't get into this mess overnight, and it's not going away anytime soon.

Okay, he's finally admitted it. Ben Bernanke, chairman of the Federal Reserve says a recession is possible. In his most blunt assessment of the U.S. economy yet he said it "will not grow much, if at all over the first half of 2008 and could even contract slightly."

He knows the weight his words can carry in terms of market psychology, so even to admit the possibility of a recession is a sobering. But what took him so long to come around to what almost everyone else already knows?

There are two possible explanations. One is the Fed actually got it wrong and didn't realize how fast the economy was deteriorating, especially housing. Two, it could see things getting worse, hence the aggressive interest rate cuts, but didn't want to seem overly pessimistic because that in itself could make the situation worse, the idea that you can talk yourself into a recession.

Bernanke does see things getting better in the second half of the year and even predicts there could be above trend growth in 2009. Some are already dismissing that as wishful thinking. Here's what economist James Knightley of ING had to say, "Above trend growth suggests that the fed is looking for U.S. GDP growth in excess of 3 percent for 2009. We struggle to see this happening given that the credit crunch is still in full swing, house price and equity market falls are depressing confidence and the labor market has only just started to shed jobs."

Knightley adds: "Bernanake is talking about the effects of monetary and fiscal initiatives doing enough to stimulate activity. However, the fiscal package is nowhere big as the one implemented in the last recession and the Fed has not cut rates as far. Moreover, the economic fundamentals are arguably in worse shape so we see the risk that this downturn could last far longer."

Bernanke himself admits his forecast that the economy will improve in the second half of the year and perform even better next year contains "uncertainty."

I think before it's all over, Bernanke will have more sober assessments. Much to his discomfort and that of those in the market who are optimistic about recovery in the second half of the year.

April 2, 0812 GMT

How can a bank announcing a massive write-down trigger a massive rally in Europe, Wall Street, and Asia?

In this case, the bank UBS was a key catalyst. Here's why ... investors figure the massive write-down is a sign that those financial institutions hardest hit by the subprime crisis are getting to the bottom of their problems.

Investors also took it as a positive sign that UBS's stock could rally close to 15 percent in New York trading, despite announcing it plans a massive rights issue to raise capital.

Some skeptics say the huge rally in UBS shares reflects more short covering than confidence. Others disagree, saying the rallies in not only these stocks, but other financial stocks Tuesday, reflect a growing confidence there may be light at the end of the subprime crisis tunnel.

The world's major financial companies reported about $232 billion in credit losses and write-downs since the start of 2007, according to Bloomberg. And more write-downs are expected.

The big question is how will the markets react to further write-downs. We've been here before, a major financial institution announces a write-down, investors think the worst is over, the market rallies, but then falters again.

There are still a lot of problems in the real economy centering around housing ... lending is tight and that's a reflection of the subprime crisis.

Even if banks do work through their problems centering around the subprime crisis, the question is when will that be reflected in borrowing costs? Until that happens, we can't think the worst is over.

April 1, 0810 GMT

It doesn't take a genius to know that this has been a terrible quarter for those who invested in the stock market.

Here's the breakdown for the record. The Dow fell 7.4 percent in the first quarter.

The S&P 500 lost nearly 10 percent. The Nasdaq 14 percent. Here in Europe, the Eurofirst 300 lost a whopping 16 percent, its worst first quarter performance on record.

In Tokyo, the Nikkei fared even worst, down 17.4 percent. But the biggest loser was the Shangai Composite which fell 34 percent.

The continuing fallout from the credit crisis and worries about the health of the U.S. economy are at the heart of the losses.

Does this mean the bear market is over, probably not. I suspect things in the U.S. economy are going to get worse before they get better, and that doesn't bode well for stocks in the near term.

Talk about a caning ... in this case, Jimmy Cayne, the cigar chomping, legendary chairman of Bear Stearns who has dumped his shares for $61 million.

Now for us mere mortals, $1 million let alone $61 million is a lot of money. But it's pocket change compared to what his shares used to be worth before the near collapse of Bear Stearns.

He sold his final 5.66 million shares this week at $10.84 a piece. Last year at their peak, the shares were riding high at $171.50 or close to a billion dollars before the sub-prime mess that led to the toppling of two of its hedge funds.

The 74-year-old Cayne, who was ousted as CEO in January, reportedly sold because he didn't have to want to vote in favor of the cut-price rate his firm is being sold for to JPMorgan.

Tough to have tears for Cayne. His reputation as a shrewd operator on Wall Street fell hard following media reports that he was either playing golf or in bridge tournaments as the sub-prime crisis unfolded.

The one-time scrap metal salesman from Illinois may no longer be fabulously wealthy by the standards of the uber rich, but he's still immensely loaded.

Cayne earned $232 million dollars in salary and bonuses for the several years he headed up Bear Stearns. In addition, he owned shares that he cashed in, previous to this last lot.

And earlier this year he closed on two 14th-floor condos at New York City's famed Plaza Hotel for $27.4 million. Which goes to show now matter hard you fall, if you're rich enough you can always rise again, even if you have to buy it.

Concerns about the financial sector are resurfacing again on Wall Street.

A key financial index fell 3.5 percent Wednesday after rising more than 10 percent in the last two weeks.

It comes after an influential analyst, Meredith Whitney of Oppenheimer & Co. warned of more problems in the banking sector. She said there was "no clear end in sight " to the downward pressure on the sector.

"Despite cutting estimates for financials by over 30 times since November, we are confident this will be our last reduction in 2008. As mark- to -market indices trend lower, the housing market worsens, and the U.S. consumer comes under increasing pressure, we anticipate further downside to both estimates and stock prices," Meredith wrote. And she didn't end there. "We anticipate the current credit cycle to be the worst in generations."

She is not alone in that observation about the current credit crunch. Alan Greenspan to George Soros have echoed similar sentiments, if not even more bearish.

As I've said many times, we didn't get into this mess overnight. There's more fallout to come. For Citigroup alone, Meredith estimates the banking giant will write down another $13 billion in the first quarter, after taking an $18 billion hit in the fourth quarter.

Not suprisingly, Citigroup's stock fell almost 6 percent to $22.05 on Wednesday. As if Citigroup shareholders needed more bad news, the stock is now off 60 percent from its 52 week high. Talk about wealth destruction, ouch.

A reader berated me for not being more positive about an unexpected rise in existing home sales in the U.S.

Apparently he didn't like the fact that I pointed out that sales are still down sharply from a year ago and that prices are falling.

It's not my job to be a cheerleader for the economy, but to tell it like I see it. And I still think there's more bad news to come.

Case in point, a house price index for 20 major U.S. cities fell nearly 11 percent in its latest reading, the biggest decline on record. And the latest reading on consumer confidence hit a five-year low.

More disturbing was the expectations component of that report. It hit its lowest level since December of 1973.

Here's what the highly respected U.S. economist Ian Shepherdson said about that: "This is very grim news indeed; if sustained at this level, consumer spending should be expected to drop to a year on year rate of about minus two percent in the near future, a pace last seen in late 1974, and then only very briefly.

"If spending does weaken to that degree, an outright recession will be unavoidable and a severe recession will be very likely. In short, this is one of the most alarming economic reports we have seen in this cycle so far," Shepherdson concludes.

And here's what James Knightley of ING had to say: "This is truly worrying as it is consistent with consumer spending contracting by around 1 percent year over year-true recession territory. If the relationship holds as it has over the past decades then further policy action seems inevitable, be it rate cuts or tax cuts or quantitative easing. Moreover, with house prices plunging, stock prices falling and now employment declining, a rebound of any significance looks a long way off. " Words of well respected economists, not my words, but I couldn't have said it better myself, and couldn't agree more.

March 25 0820 GMT

Optimism on Wall Street Monday was fueled by a revised offer for Bear Stearns and a surprising increase in sales of previously owned homes. I don't want to throw cold water on Monday's rally but I have a few buckets in reserve regarding the latest housing figures.

The monthly rise broke a six-month run of declining sales, but let's look beyond the headline here. Sales are still down nearly 24 percent from a year ago. And the median price fell just over 8 percent compared to a year ago to $195,900. That means houses are worth less -- that's not good for confidence or the economy. Rising foreclosures are one of the big factors behind those lower prices.

The number of unsold homes fell. But again, there's still a 9.6-month supply of unsold homes, still high by historical standards. So let's not get too excited by the latest housing figures.

Meanwhile, remember that $170 billion stimulus plan to get the U.S. economy moving? The bulk of it is aimed at individuals and married couples through tax rebates. But talk about throwing money down the drain, most Americans won't be spending it.

A new CNN poll shows that 41 percent of respondents plan to use their rebates to pay off bills, and 32 percent will put the money in savings. Just 21 percent say they'll spend the money.

In the past taxpayers spent two-thirds of their rebate check. But then again Americans are in worse shape this time round, up to their eyeballs in debt. So anyone looking for a quick turn around in the economy, don't look to the consumer or to housing to set things right.

Wall Street returns from the Easter break with one big question, can the rally continue? To recap what happened last week, both the broader market, and more importantly the financial, broke a three-week losing street.

Actions by the Fed and better than expected earnings from Morgan Stanley and Bear Stearns went a long way to boosting confidence.

This week there will be several economic reports that should continue to paint a picture of an economy in trouble. Existing home sales for February, due on Monday, are expected to fall to an annual rate of 4.85 million units from 4.89 million the previous month. New homes sales out on Wednesday also expected to show a decline. Sound off: Have your say on Todd's blog

Housing remains hit by falling prices, rising foreclosures, tougher lending requirements, and mortgage rates that remain stubbornly high. For instance, fixed rate mortgages are around 5.8 percent, substantially above a 3.3 percent 10-year government note. In ordinary times that mortgage rate should more closely follow what happens with the 10-year note. But these aren't ordinary times.

The big problem for investors is a lack of confidence. This is backed up by the amount of cash that fund managers now hold.

A global survey of fund managers by Merrill Lynch found an unprecedented combination of high cash levels and low risk appetite. A record net 42 percent of asset allocators were "overweight" cash, that's higher than even in the aftermath of the September 11 terrorists attack in New York.

That same survey shows that three-quarters of fund managers expect low growth and above-trend inflation this year. More than a fifth think the world economy is in recession.

In short, the money is there to ignite a rally, the conviction isn't.

March 21, 0830 GMT

With most markets closed for the Good Friday holiday, it's a good time to look back on the week. Europe ended down for the week, the broader market off by more than 2 percent.

But on Wall Street it was a sharp contrast. All the major indices were up, with both the Dow and the S&P 500 gaining more than 3 percent.

Several factors helped, but what stands out was further aggressive action by the Federal Reserve and it goes beyond another chunky rate cut.

First it engineered a deal for JP Morgan Chase to take over Bear Stearns. It also said securities firms could borrow directly from the Fed through its discount window: usually only commercial banks are allowed to do that.

I think that was hugely important because it offered a place to get financing to help shore up balance sheets hurt by the credit crisis.

The Fed, criticized for not being creative enough, is now getting kudos from the financial community. Financial stocks and the broader market in the U.S. broke a three-week losing streak. Sound off: Have your say on Todd's blog

What else stands out this week was a selloff in commodities. A key index of 19 commodities fell 8.3 percent this week, the most since 1956. It had touched a record as recently February 29.

A slightly stronger dollar, more confidence in the U.S. Federal Reserve, lingering concerns about a U.S recession,and hot money moving elsewhere were all factors in falling commodity prices.

Will this be the week that is seen as a turning point? Some are suggesting at least for the U.S. stock market it is... I think it's too early to make that call, but what is clear, is the Fed's aggressive actions have at least, for this week, made investors a little more hopeful.

March 20, 0830 GMT

In these uncertain times the rumor mill is working overtime but authorities in the UK now say it's gone too far. It involves rumors about one of Britain's biggest banks, HBOS.

At one point Wednesday morning the stock was down 17 percent on rumors it was having funding problems. There was chatter about other banks as well.

This led the Bank of England to the highly unusual move of calling news organizations to say it hadn't had emergency meetings to talk about the specific UK banks, including HBOS.

It also led the UK's financial watchdog, the FSA, to start an investigation into who started the rumors. In a sternly worded statement the FSA said: "There has been a series of completely unfounded rumors about UK financial institutions in the London market over the last few days, sometimes accompanied by short-selling. We will not tolerate market participants taking advantage of the current market conditions to commit abuse by spreading false rumors and dealing on the back of them."

Will authorities get to the bottom of it? Tough to know. They certainly have raised a red flag.

But with the credit crunch still a real problem, and banks at the center of it, it's easy to see how quickly short sellers can take advantage of it, especially considering this incident followed the bailout of Bear Stearns.

It's tougher getting to the bottom of those who profit from short-selling by spreading false rumors, which can if unchecked lead to brutal consequences.

There's still a lot of skepticism out there about the sustainability of the rally.

"Survivor's euphoria may be only short lived," reads one headline, another in the Financial Times reads: "Analysts say upsurge could be short lived."

The bottom line is the markets ignored the continued bad news coming out of the U.S. economy Monday including the latest number on building permits hitting a 16-year low.

Instead the market focused on better than expected earnings from the Lehman Brothers and Goldman Sachs and of course the Fed's rate cut. We've been here before -- a big rally with no sustainable follow through.

One fund manager was quoted as saying: "There is relief across the board but I don't have confidence this will last beyond the short term. The economy has stresses and if stocks fade that will knock sentiment in credit."

The Fed didn't give the market the full percentage point cut it expected.

But it gave most of it, three quarters of a point -- a sizeable enough cut to keep investors happy.

Given that the Fed highlighted further concerns about inflation and that two of its voting members wanted less aggressive action, that's about as far as the U.S. central bank could go.

The Fed once again highlighted the "downside risks" to growth, and as in previous statements indicated its willingness to do more if needed. That already has commentators speculating about when the next rate cut will be, and has Wall Street rallying strongly.

Just remember, there are still severe problems in the economy, and liquidity in the markets remains constrained, making more Fed easing a strong likelihood.

Thanks to all of you who have responded to the blog. It's great getting so many comments and perspectives. And many thanks to those of you who have told me how much you like my "tell it like it is" style -- it's the only way I know to tell it! Keep 'em coming. All the best Todd.

Most outrageous comment of the week has to be Heather Mills who is nearly $50 million richer after her divorce settlement with Paul McCartney, but apparently not happy about payments for the couple's daughter Beatrice.

"Beatrice only gets £35,000 a year, so obviously she's meant to travel B class while her father travels A class, but obviously I will pay for that."

What planet is this woman on? Many families in the UK don't have £35,000 a year, let alone that amount for one child. In addition, Sir Paul will pay for Beatrice's nanny and school fees.

I'm not taking sides here, but I find it absolutely amazing she can make such a statement and then wonder why the public isn't more sympathetic towards her.

The Fed has been pulling out all the stops trying to keep the economy from veering into a deep recession. Now it's front and center again today when it holds a policy meeting.

The markets are betting that the Fed cuts its key rate by a full percentage point -- that's a massive cut. A cut of that magnitude hasn't happened since the 1980s.

Anything less than a full percentage point cut would disappoint the markets and likely lead to a sell-off.

The Fed is in a tough position. A cut of that size would take its key rate down to two percent, leaving it closer to its final bullets in its interest rate cutting bag.

Also, it is cheap money that helped create the financial mess we're now in and the Fed could be making the same mistake twice.

And then there's high oil and commodity prices and fears that inflationary pressures are building.

So far the Fed's aggressive easing hasn't turned the economy around, but the Fed is betting eventually it will, and at this point is willing to do whatever it takes to make sure it happens. It's a big bet, but one the Fed feels it can't afford not to take.

Commenting below on this blog, Ravi said: "The Fed's pumping more liquidity into the system is akin to feeding oxygen to an already out of control fire!"

I would say the Fed is prepared to carry as many logs as it takes to try to solve the financial crisis. And you can just as easily find those who applaud the Fed's actions as are in Ravi's camp.

As I indicated in my blog early this morning, European markets were expected to open sharply lower, and they did -- and closed even lower.

Led by the beleaguered financials, the broader market closed down 4.6 percent.

Swiss banking giant UBS, feeling more like a dwarf as it continues to lose market value, shed 14 percent this Monday, its biggest one-day decline since September of 1998.

Meanwhile, in New York, stocks with about three hours of trading left have come off their lows of the day, but Lehman Brothers is under severe pressure and I think it's a good litmus test as to whether investors are confident another shoe isn't about to drop.

Clearly there are still major concerns that Bear Stearns isn't a one-off. I still feel there's more pain to come, and the market which just 20 minutes ago was less than a 100-point lower is now back in triple-digit losses.

March 17, 0820

As I write this Asian markets are tanking, and European markets are expected to open sharply lower. This isn't the way the Fed and the Bush administration wanted the scenario to unfold.

After all, the fire sale of investment bank Bear Stearns to JP Morgan for just two bucks a share was supposed to put a line in the sand over the contagion. But instead, it underscores the fear investors have over the health of other investment banks and financial institutions.

Confidence is in short supply right now, and there's a growing unease that the neither aggressive easing by the Fed, or keeping a major Wall Street securities firm afloat, will end the crisis.

The U.S. financial crisis now under way is the worst financial crisis in the post-war period. JP Morgan undoubtedly thinks it got a bargain in buying Bear Stearns at a fire sale price ... Bear Stearns' midtown Manhattan headquarters is estimated to be worth $1.2 billion and JP Morgan paid just $240 million for the entire firm.

But this deal isn't about real estate. This is about authorities trying to maintain the stability of the financial system. But given how markets are trading right, no-one believes the worst is over, and many are wondering, who's next?

March 13

Just want to update you on the compulsive gambler who lost $4 million with his bookie and then sued the bookie.

I wrote about him in my February 22 blog. Briefly, he blamed the British bookmakers William Hill for taking bets when they knew he had an addiction and he had asked them to freeze his accounts.

His account was closed for six months and he wasn't allowed to place telephone bets.

But then he turned to placing cash bets at their shops, waging more than a million bucks in a six-month period.

William Hill denied any wrongdoing. It says the gambler was an adult and rejected his claim that it was legally responsible for his losses. And now the High Court has ruled in favor of William Hill.

It said it wasn't their responsibility to protect its known problem gamblers from the "financial and psychological" consequences arising from their gambling.

It also said the gambler would have been financially ruined without William Hill, because he would have gone elsewhere to feed his gambling compulsion.

Now, the gambler who claims his life was ruined as a result of his gambling spree with William Hill, is being ordered to pay over $675,000 towards William Hill's legal costs.

I said back in February, this guy's case was misguided and the High Court agrees. Another victory for self reliance and not blaming others for self-inflicted problems. Clearly he needs help with the addiction but not a financial bail out.

March 12

The Fed is reaching deeper into its bag of tricks. Its latest and boldest move to date involves allowing banks to swap high-quality, mortgage-backed securities for treasury bonds for a 28-day period.

The Fed hopes this will improve liquidity in the credit markets. On Wall Street it was greeted with a huge sigh of relief. The broader market had its best one-day rally since October 2002.

But will the plan, which also involves other central banks, work? I'm skeptical. What ills the financial markets goes way beyond a liquidity issue. Others are skeptical too.

The Financial Times in an editorial this morning had this to say: "If it is simply the case that banks do not have the cash to lend against mortgage bonds, then this will have an effect. If on the other hand, banks are worried that the mortgage bonds or their owners will default, then they will be unlikely to lend even if they can refinance at the Fed."

And it goes on to say: "Banks' need for liquidity is hard to observe directly, but the evidence implies that the greater problem is solvency, and that the latest intervention will therefore have little effect."

We didn't get in the mess we're in overnight, and it's going to take much longer to unwind. We've seen these relief rallies before, only to fade. Expect nothing different this time.

March 11

Oh how the mighty fall. Reports linking Eliot Spitzer to prostitution have left jaws dropping and other people gleeful. He was the hard-charging attorney general who rooted out corruption on Wall Street.

The irony of his alleged use of the high-end prostitution service is that he himself as attorney general busted prostitution rings.

When the news broke linking Spitzer to the prostitution ring there were cheers on the New York Stock Exchange floor. He had made plenty of enemies, not only for what and who he pursued, but for a style that was seen as abrasive and holier than thou. Read more about the Spitzer allegations

He had been dubbed by TIME magazine as "Crusader of the Year," He rode the white horse finding "betrayals of public trust," that were in his words "shocking" and "criminal."

Now he finds himself as governor of New York with the shoe on the other foot. It's he who has betrayed pubic trust. Known in a federal affidavit as Client 9, the affidavit details how he arranged for the meeting with a prostitute named Kristen to travel from New York City to Washington D.C. When asked about payment, Client 9 said: "Yup, same as in the past, no question about it."

Spitzer has not been charged and he hasn't resigned yet as governor, although speculation is rife that he will resign. In a statement with his wife by his side, Spitzer, the father of three said: " I have acted in ways that violated my obligation to my family, that violates my standards of right or wrong. I apologize first, and most importantly, to my family. I apologize to the public."

How humiliating for his poor wife to have to stand by him while he made his confession.

Spitzer was unforgiving as a public servant, his enemies are relishing this moment. It's his family I feel sorry for. They have to deal with a personal betrayal, that's more damaging and runs far deeper than any betrayal of public trust.

March 10

It's tough being an optimist these days. The data in the U.S. economy keeps getting worse and the latest blow came Friday with a dismal employment report: 63,000 jobs lost in February, the worst in nearly five years.

Look further into the numbers and it's even more bleak. Private sector jobs fell by 101,000, and the government said they had to revise down the previous two months by 46,000 jobs.

And the worsening situation on the employment front isn't over yet. "We can't see any reason why the downward trend should slow in the near future. You should expect a sustained run of falling employment across the board," predicts Ian Shepherdson of High Frequency Economics, a highly respected group based in the US.

Shepherdson points out that during the mild recession of 2001, the low point for the three-month average in core private payrolls was a loss of 364,000, compared to just 88,000 now, "so simple numerology suggests there is plenty of scope to the downside."

Of course, if more people are losing jobs, or fear losing their jobs, that doesn't bode well for consumer spending in the US, the world's largest economy. That in turn has ramifications for the global economy.

I've been bearish on the US economy for a long time and I still think things will get worse before they get better.

Even before the jobs report came out on Friday, the news headlines made for dismal reading. On the front page of the Financial Times their lead article was "Americans are getting poorer, say Fed figures.." Elsewhere in the paper on the same day: "Warning over bond spreads in Europe," "Margin calls hit Carlye Fund," "The vicious trap that haunts the debt markets," "UBS hit by writedown rumors," "Hedge funds spark fixed income stress, " "Gloom set to worsen as threat of spiral grows," and "Fresh turmoil hits US and European stocks."

That last headline they could have used again on Saturday following the dismal jobs report. Instead the headline read "US employment slide adds to recession fears."

Anyway you read it, it all adds up to same thing. Things are looking worse. The optimists got it wrong.

March 6

Even though their are concerns about slowing growth in the eurozone, don't expect the European Central Bank to cut interest rates today.

They watched the euro climb to record highs, been pressured by politicians, but still haven't budged on the interest rate front keeping their key rate at 4 percent.

Why the tough stance? In one word, inflation. It's running at 3.2 percent, well above the ECB's comfort level which is below 2 percent. They're even expected to revise upward their inflation forecast for the year at today's meeting.

In that environment you can't expect them to trim rates. They haven't budged on rates now for nine months. They haven't cut rates in nearly five years.

Contrast their stance to the Fed, which has already slashed rates by more than two full percentage points since September to 3 percent and is expected to cut it again by at least a half point at their meeting on March 18.

The Fed acknowledges that there are inflationary pressures but it's betting it won't get out of hand and at this point it's more worried about weak growth.

That's a bet the ECB isn't willing to make with its own economy.

Most economists expect the ECB will lower rates by a quarter point by the end of June and again by year end to 3.5 percent. I'm not sure that will happen.

At least if the economy goes in the tank, the ECB won't have to worry about inflation -- something the Fed can't bank on it, a double whammy for the U.S. economy, another blow to the Fed's credibility as an inflation fighter.

March 5

OPEC ministers are meeting today. With oil prices hitting triple digit levels, and the U.S. economy heading further south day by day, there's pressure on OPEC to pump more oil.

No one less than President George W. Bush was doing the jawboning on the eve of the oil producers meeting. "I think it's a mistake to have your biggest customer's economy slow down ... as a result of high energy prices."

OPEC knows the U.S. economy is slowing down, but won't take the heat for sky-high oil prices. It says other factors are driving the price of oil including the weak dollar and speculation, not a lack of supply.

Saudi Arabia's oil minister made OPEC's position very clear in a newspaper interview. He put the blame on the speculators. "This speculation has no link to the stable market fundamentals which do not need any action, he said. "Why then should any new action be taken if the health of the market we follow is sound?"

So don't expect any change in output at this meeting, and expect oil prices to remain high, but don't blame OPEC.

Maybe Mr. Bush should be spending more time telling Americans to drive less. Lack of good public transportation in most cities makes that a challenging proposition. But the finger is pointed the wrong way. A too-heavy reliance on cars, and speculators are the real culprits, not OPEC.

March 4

When one of the world's richest men -- and certainly the smartest stock picker --says the U.S. is in recession, people take notice.

So not surprisingly, Warren Buffett's pronouncement that the U.S. is in recession by "any common sense definition" hit the headlines.

For the record he made the comment in an interview with CNBC. Buffet of course knows that the technical definition of a recession is two consecutive quarters of negative growth.

But you don't get to financial guru let me hang on your every word status by sticking to technical definitions. For Buffet it is simple: "Most people's situation ... certainly their net worth ... has been heading south for a while now."

Buffett also said stocks were not cheap and predicted the dollar's decline is not over.

Meanwhile, former Fed chairman Alan Greenspan told the Financial Times that "the rate of growth in economic activity is effectively zero."

Both Buffet and Greenspan carry a lot of clout in the financial world.

Greenspan's detractor's say the reason for the economic mess in the U.S. in part stems from Greenspan keeping money too cheap too long, which led to the housing bubble and which led to people mispricing risk.

I would agree with those detractors, but on Greenspan's point about the economy stalling, there's no argument.

It's clear the U.S. is in the midst of a severe downturn. Whether you want to stick to the technical definition of a recession is up to you.

For my money, I'll take Buffet's definition. Over the long run, he's proven he is a lot smarter than those who stick to technical definitions.

March 3

Asian stocks falling the most in a month on Monday. In Tokyo, the Nikkei falling 4.5 percent, other markets off close to 3 percent. European markets opening sharply lower. It follows a rout on Wall Street on Friday where the Dow dropped 315 points or 2.5 percent. The Standard & Poors's 500 Index and the Nasdaq also took a drubbing. Major indicies there now down for the fourth month in a row.

The market can't shake off fears about a recession and rightfully so. The economic data keeps getting worse. A report on business conditions in the Midwest were the worst in more than six years. A separate report said U.S. consumer confidence was at its lowest level since 1992.

You can easily see why Asian investors get spooked. Some 22 percent of Japan's exports go to the U.S., about same amount for China. Make no doubt about it, the U.S. recession has global ramifications.

HSBC, one of the world's largest banks, came out with its annual results today. Here's what it had to say: "The outlook for the rest of 2008 is uncertain. The economic slowdown and the credit outlook in the U.S. may well get worse before they get better. Emerging markets have only partly decoupled from the U.S. Hence, while these economies are exhibiting more domestic momentum, they will not be entirely immune from the impact of a U.S. slowdown. However the long-term trends are still intact."

I've been saying for a long time that its going to take considerable time for the housing crisis in the the U.S. and credit crisis to unwind. It means further losses for banks, and that means much tougher lending conditions.

The Fed's been working overtime on the interest rate cutting front trying to right what's wrong with the economy. But it hasn't worked - instead it's added to the dollar's woes which in turn has helped to boost commodity prices, stoking fears of stagflation. God what a mess, and its not ending anytime soon.

February 27

The dollar has hit a record low against the euro, trading at the $1.50 level.

Great if you're using euros for a shopping spree in the United States. But worrisome if you're a European exporter because it makes your goods less competitive. And it could get worse in the near term before it gets better.

The reason the dollar keeping falling against the euro and remains weak against other currencies is because of the expectation the Fed isn't done yet cutting interest rates.

It is expected to move by another half point at its meeting in March. It has already slashed rates by more than two percentage points since September as it tries to get the U.S. economy back on track.

Contrast that with the European Central Bank. It hasn't moved on rates since last June. Its key rate remains at 4 percent -- higher than the fed key rate which is currently a full percentage point lower. That's helping to keep the euro strong against the dollar.

The big question is how low does the dollar go? A Bloomberg survey of 41 analysts expects the dollar could actually rebound by the end of March to $1.48 per euro. But Merrill Lynch disagrees. It thinks the dollar will fall to $1.57 per euro by the end of March. Either way, the dollar remains weak.

February 26

The U.S. housing market is in the midst of its worst downturn since the Great Depression of the 1930s and it shows no signs of improving anytime soon.

The latest report on existing home sales makes for uncomfortable reading.

Existing home sales are now down 24 percent on the year, 32 percent from their peak in 2005.

The amount of homes unsold continues to rise, now at a 10-month supply. Not surprisingly prices continue to fall. The median price is just over $200,000.

The chief economist of High Frequency Economics had this to say: "Expect sales and prices to keep falling; there is no end in sight for the housing disaster."

Another economist, Dimitry Fleming of ING put it this way: "We don't know when U.S. housing will emerge from the ashes, but don't count on it in the next few quarters."

During the 1980s housing crash, sales fell 50 percent and Fleming says that magnitude of drop could happen again. Sounds plausible to me -- consumers are tapped out, worried about their jobs, and even if you're in the market looking for a home, why buy today if you think its going to be cheaper tomorrow?

Add to that tougher lending criteria and rising foreclosures and it's easy to see why housing is in such a mess.

February 25

If you want to pump up the markets, just mention the possibility of a rescue plan for the bond insurers. In this case the bond insurer is called Ambac which could get up to $3 billion in new capital.

Here's the deal. Bond insurers in the U.S. are facing the prospect of losing their AAA credit ratings because of losses tied to the sub-prime crisis. Banks could be losers too if that happens because they also have ties to these bond insurers.

By one estimate it could cost banks as much as $70 billion, on top of the heavy losses they are already nursing from the sub-prime crisis.

If the banks have further losses, that could make credit even tougher to get and even more expensive, making any downturn in the economy that much longer and more painful. And any hint of that would cause a further downturn in stock markets.

If you're still not convinced what happens to the bond insurers matters to the markets, look no further than what's happened to the markets on word that Ambac could get a rescue package.

The markets rallied in the U.S. late Friday on word that a rescue package for Ambac could be announced as early as this week. It also triggered a rally in Asia and now the European markets are running with it. And who's leading the rally? Not surprisingly, financial stocks.

Bond insurers: Dull by reputation, but they have sure have the markets' attention, and with good reason.

February 22

What do you do if you're a compulsive gambler who loses four million dollars with your bookie?

You take your bookie to court of course. Yes, you're reading right: a compulsive gambler here in England is doing just that.

He blames the bookmakers William Hill for taking bets when they knew he had an addiction and he had asked them to freeze his account.

Now his account was closed for six months and he wasn't allowed to place telephone bets. But then he turned to placing cash bets at their shops, wagering more than a million bucks in a six-month period.

He also says he was able to open a new telephone account using a different credit card, even though other betting shops barred him.

Formerly a successful greyhound trainer, the man apparently got into trouble when he started betting outside his area of expertise.

He now says he's a ruined man, having placed some obscenely large bets including a near £700,000 bet on the 2006 Ryder Cup.

At the heart of the case is the question over the extent to which bookmakers should protect problem gamblers from gambling and it could lead to new guidelines on "socially responsible conduct."

William Hill denies any wrongdoing. It says the gambler was an adult and rejects his claim that it is legally responsible for his losses.

For the record, I agree with William Hill. There are plenty of places to deal with your addiction. Seeking compensation in a court isn't one of them.

February 21

More revelations about lax controls at Societe Generale.

The report from three independent board members said management didn't follow up on some 75 warnings over more than two years.

I know that food in France is good, but you have to ask yourself what were those who were supposed to be overseeing trading, doing with their time.

"Systematically, employees were not thorough enough in their checks," the report says. "No initiative was taken" to check out Kerviel's explanations "even when they lacked plausibility," it says.

On the face of it, oil shouldn't be at a $100 a barrel. The U.S. economy is either in recession or on the edge of it.

And those worries actually took oil to the mid 80s twice since crude first popped to a hundred bucks last month. So why a revisit to the $100 level now?

First, fears that OPEC could cut production when it meets next month. I think that's unlikely if oil prices remain firm. They like the revenue, but wouldn't like the bad public relations that would dog them if they are seen adding to consumers' woes.

The other main reason that oil spiked is a fire at a Texas refinery. It could possibly be closed for as long as two months.

Other factors in oil's lofty price include a weak dollar, and a legal dispute between Venezuela and Exxon Mobil.

I admit oil prices should stay relatively firm on the back of surging economies in China and India,. And yes, tension with Iran isn't going away, and there continues to be supply disruption in Nigeria.

But having said all that I do think oil at $100 a barrel has gotten ahead of itself. It makes for great headlines, and blogs, but based on fundamentals a $100 price tag just doesn't stack up.

February 19

U.S. markets are back in action today after the President's Day holiday Monday.

For those keeping score, the S&P 500 has fallen just over 8 percent this year and 14 percent below its October record close.

It has also stayed above its closing low of 1,310.50 last month.

And that's comforting for the bulls who see better times ahead. They're optimistic because of the aggressive interest rate cuts by the Federal Reserve with the prospect of more to come.

The government's stimulus package centered around tax rebates should also boost the economy down the road.

That doesn't mean there won't be jolts along the way, but the building blocks for better times are in place.

The bears point to the continued weakness in the housing market and the continued fall out from the sub-prime crisis with tighter lending standards as major problems.

I've been bearish for a long time, I still think the credit crisis hasn't fully played out. Any further signs of weakness in the economy or credit markets will be uncomfortable reading for the optimists.

February 18

To say the Northern Rock affair is a huge embarrassment for Britain's Labour government would be understatement. It's been an unmitigated disaster. The government is insisting it will be "business as usual" for Northern Rock. But everyone knows it isn't.

In the end, nationalization was the only option left to the government. The private offers on the table didn't "deliver sufficient value for money," according to the chancellor Alistair Darling. The question is why didn't the government move more adeptly and quickly at the time of the crisis, potentially avoiding the situation it now finds itself in.

What it can only hope for now is that eventually the financial markets stabilize, allowing it to sell on Northern Rock's loan book and in doing so, recoup the money loaned to Northern Rock to stay afloat.

Ultimately of course the blame for this whole fiasco lies with Northern Rock's irresponsible management. But short of that, the government has badly mismanaged the whole affair, further undermining Labour's credentials for economic competence, and undermining Britain's reputation for financial competence in the process.

February 15

There's a stench of fear that refuses to break .That's how one U.S. economist explained the latest sell off on Wall Street. And he's absolutely right. Wall Street operates either on fear or greed and right now fear has the upper hand.

Banks and securities firms have already racked up more than $146 billion of losses related to the subprime crisis. And those losses could reach $400 billion according to some estimates.

It's fear of further losses that has the market spooked. A lot centers around the bond insurers, the folks who guarantee the bonds against default. They've been caught up in the subprime mess, and it's biting badly.

Now one of them, FGIC, the fourth largest bond insurer in the U.S., has had its credit rating slashed by Moody's Investors Services, making it the first big bond insurer to lose its top rating from all three major ratings agencies.

What the market fears is that credit downgrades of the bond insurers would lead to further write downs on the bond portfolios of banks.

All this seems removed from our everyday lives, but it isn't. Because what it means is that credit isn't available, or becomes more expensive, and that impacts everything from cities trying to raise money, to companies borrowing it, to consumers borrowing it. Tighter lending standards and more expensive money just prolongs the prospect of an economic downturn.

Everyone knows what the problem is, how far the problems go in the subprime and credit crisis isn't known. And that's the problem, not knowing when or how it all ends. Yep, the economist got it right, there's a stench of fear that refuses to break.

February 14

Could media mogul Rupert Murdoch have his sights on Yahoo? The News Corp. supremo last week said he wasn't interested.. Now reports say he just well might be... But in this case it appears to be Yahoo doing the heavy courting.

The Wall Street Journal is reporting that a deal being discussed would swap News Corp.'s ownership of MySpace and several other online properties for a 20 percent stake or more in Yahoo.

Yahoo is scrambling to find an alternative to Microsoft which has made a hostile bid for the Internet search engine. The Journal says News Corp. thinks there is only an outside chance a deal between them and Yahoo will happen. Major Yahoo shareholders wouldn't be happy with News Corp's interest... Microsoft's bid, likely to be raised, is viewed by them as the best deal that Yahoo will get.

But for now Yahoo continues to play hard to get and continues to search for alternatives.

February 13

If you want to know how not to go about making public policy, look no further than the UK. Specifically, the Treasury and the accident prone Chancellor Alistair Darling. Call this episode, no thanks Darling.

There's been a huge backlash against government plans to clamp down on rich foreigners (specifically the so-called non-domiciles) who live here, but avoid paying any personal taxes. The reason the rich are rich of course is because they know how to avoid or minimize their tax liability. Even the less wealthy would have been affected.

What the fat cats feared wasn't so much the £30,000 ($58,000) annual fee the treasury wanted them to stump up, but potential other income not made here in the UK.

The threat of a less friendly tax treatment had the rich calling up estate agents in London with the idea of selling up and moving out. Big financial institutions said the tax law changes would make it more difficult to attract the best people. Greek shipping tycoons also threatened to pull up anchor. Switzerland stepped up its campaign to attract those contemplating leaving London.

You may not like the filthy rich but let's not lose sight of the fact they can generate a lot of revenue and employment through their activities. One example, it's estimated more than 60 percent of all the private equity deals in Europe happen here in London, which in turn generates £5.4 billion in professional services. Its estimated about 40 percent of bankers in the City were non-domicile. All that involves a lot of employment and a lot of money being pumped into the economy.

Even the trade and investment minister in the UK, warned it was a road to madness in targeting the non-doms. No longer would London be perceived as a global financial center, friendly to business.

The heavy lobbying campaign now finds the Treasury doing a partial U-turn. It still wants the £30,000 annual fee. But it said it never intended to get its tax hooks into income and gains that were generated outside the UK and stayed outside the UK.

The lobbying is expected to continue for more concessions. Whatever the outcome, the perception of a chancellor out of touch with the importance of business, fat cat or not, will linger.

February 11

Yahoo is expected to officially reject Microsoft's 31 dollar a share offer today. No real surprise there. Culturally, Yahoo has no love feast with Microsoft, and more fundamentally, Yahoo thinks it's worth more

Leaks seems to suggest its unlikely to give serious consideration to anything less than 40 dollars a share. But its tough to see Yahoo justifying that kind of price, given its business prospects.

So where's Yahoo's leverage? It can strike a deal with Google to take over its search advertising. But the bulk of Yahoo's shares are in institutional hands. They rather take the money and run, especially given how poorly Yahoo's share price has performed. So that means Microsoft pays up. It desperately wants Yahoo. But its not likely to be desperate enough to pay 40 dollars a share.

It seems a price somewhere between Microsoft's original offer and the 40 dollar price tag Yahoo is dangling seems the most likely outcome. But it will be a long and tortuous road getting there.

February 8

Politicians in Washington are tripping over themselves extolling the virtues of the $152 billion economic stimulus package. Senate Majority Leader Harry Reid said the stimulus package would "change the economic direction of this country." President Bush said the plan is "robust, broad-based, timely and it will be effective."

But will it be effective? I have my doubts. Consumers are up to their eyeballs in debt, housing remains in a mess, the employment situation is worsening, and consumers are tightening their belts.

According to a survey by UBS and the International Council of Shopping Centers, 46 percent of those surveyed plan to use the rebate to pay off debt. Another 28 percent plan to save it. Only a quarter or 26 percent said they would spend it. If those results hold up it looks like the big winners will be lenders with a lot of retailers twiddling their thumbs.

And I have my doubts that tax breaks for businesses to buy equipment -- also part of the package -- will make a big difference. If you think the economy's in dire straits are you going to write out a big check for new equipment? I doubt it.

But this being an election year, politicians have to look like they are doing something, talk it up big, and hope the economy is showing signs of improvement by the time the election rolls around in November. If it is improving, it's the Fed's aggressive interest rate cuts that will be the biggest factor, not the stimulus package. But that distinction is likely to be lost in the campaign rhetoric. After all, they are trying to get elected.

February 7

No surprises. As expected the Bank Of England cut by a quarter point to 5.25 percent. It highlighted worries about the global outlook, tighter credit conditions, easing consumer spending here in the UK and the prospect of slower growth in the UK.

As expected, the ECB is standing its ground, keeping its rate unchanged at 4 percent. But as I mentioned in my previous blog economists are betting the ECB can't stand on the sidelines indefinitely.

*********

Two key interest rate decisions on tap today. First the European Central Bank. Unlike other central banks of late, it's been keeping its powder dry, unwilling to lower rates because of inflation worries. It's got ammunition for its tough stance. Eurozone inflation hit 3.1 percent in January, a 14-year high. The ECB would rather have it less than 2 percent.

But the ECB also knows the eurozone economy is slowing and isn't immune to the nasty headwinds from the U.S. economy. So what everyone is hoping to hear today is a change in tone from the ECB... that the downside risks to the eurozone economy are increasing. If it gets that much, then that leaves the door open for rate cuts down the road. For many economists it's not a question of if the ECB cuts rates this year, but when... No one expects it to happen today. It will leave its key rate at 4 percent. But by year end, economists think rates will be a half point lower.

Meanwhile, the Bank of England is expected to cut rates by a quarter point to 5.25 percent. It would be its second rate cut in three months. Consumers are retrenching, the housing market is worsening. It too has some inflation concerns, but at this point worries about slowing economy are likely to win out.

February 5

A lot of debate about whether the worst is over in the markets... whether the past few weeks were a bear market rally, and if so, how long could it continue.

Teun Draaisma, the respected European equity strategist at Morgan Stanley, believes we are in a bear market and says investors should stay patient, focus on earnings stability and capital preservation.

However, he believes we have entered a bear market rally which could be re-tested later on, but not broken.(i.e. not going lower than the previous low). He's highly respected, and I think he gives great food for thought.

Here's the highlights of his findings on European bear market rallies:

• there have been 9 bear market rallies since 1970

• these bear market rallies last on average 4 months, and the average size is 21 percent.

• bear market rallies are driven by the hope that reflationary efforts by authorities (lowering interest rates) will succeed

• bear market rallies are often too big and too long to completely ignore. Markets can be seen as a device with as sole purpose to wrong foot as many investors as often as possible -- a long and big bear market rally does exactly that, wrong footing the majority, just when it becomes a consensus view that we are in a bear market

• bear market rallies start typically about a year into the bear market, after a 20-45 percent initial correction. The bear market rally that started on Jan. 23, we think, started after a 21 percent correction eight months into the bear market

• there have often been two bear market rallies of more than 10 percent during bear markets. The current bear market rally would count as the second one during this bear market, after the 12 percent rally from mid-August to mid-October

• As one would expect, all trends reverse during the bear market rally -- the underperformers during the bear market outperform during the bear market rally, and vice versa.

Bottom line, if you choose to buy in this market, be nimble; as Draaisma reminds us: These markets are not for everyone, of course, and the danger is that if you buy into it you don't get out in time.

Buyer beware, good luck.

February 4

When you're number one, you don't stay on the sidelines. Google is on the counter attack following Microsoft's unsolicited $44.6 billion bid for Yahoo!. Its chief legal officer is already raising the spectrum of potential anti-trust issues. He says a combined Microsoft and Yahoo! "raises troubling questions."

"Could the acquisition of Yahoo! allow Microsoft, despite its legacy of serious legal and regulatory offenses, to extend unfair practices from browsers and operating systems to the Internet?" he continues.

"Could a combination of the two take advantage of the PC software monopoly to unfairly limit the ability of consumers to freely access competitors' e-mail, IM and Web-based services?"

Google's chief legal officer is hitting all the right anti-trust fear buttons. But the counterargument is that a combined Microsoft-Yahoo! combination would actually be welcomed by certain advertisers because it would mean more competition for Google, which now dominates the Web search and online advertising market.

There's a lot to play for here, and Google is pulling out all the stops to try and protect its turf. Reportedly, Google has already contacted Yahoo! to help thwart the Microsoft bid. Google knows it can't bid for Yahoo! itself because of anti-trust issues, but according to the Wall Street Journal it could potentially offer money or guaranteed revenue in return for a Yahoo! advertising outsourcing pact. But that also carries potential antitrust issues.

So for now, Google has to try and paint Microsoft as the tech anti-Christ and hope that someone else comes up with a credible alternative bid for Yahoo!. In trying to thwart Microsoft's bid, Google has said: "This is about more than simply a financial transaction, one company taking over another. It's about preserving the underlying principles of the Internet: Openness and innovation."

That sort of high-mindedness rings hollow given Google's dominant market share. But hey, you wouldn't expect Google to play it any other way, given their own market dominance, they have to pretend to take the moral high ground and hope the public doesn't see through it. But, as we all know, the public is a lot smarter than that.

February 1

I'm not a tech guy, but I know when a knockout blow is a knockout blow.

Microsoft's dazzling $44.6 billion offer for Yahoo!, a 62 percent premium over its closing price Thursday, is a stunning offer. It's not a friendly offer, Yahoo! and Microsoft had apparently been talking for quite a while, but Microsoft couldn't convince Yahoo! to do a deal.

Ironically, doing it now -- despite the hefty price tag -- probably saved Microsoft a bundle, by one estimate $25 to 30 billion. That's because Yahoo!'s share price wasn't far off its 52-week low, when Microsoft decided to pounce. Will they have to pay a bit more? That's unclear. Is someone else likely to pay the sort of money that Microsoft is forking over? Probably not.

In its press release about the deal, Microsoft didn't mention Google by name(why give their competitor and nemesis a free plug) but instead says: "Today the market is increasingly dominated by one player who is consolidating its dominance through acquisition. Together Microsoft and Yahoo! can offer a credible alternative for consumers, advertisers and publishers."

That's what this deal is all about, trying to beat Google at its own game -- beating the name that came out of nowhere, knocked Yahoo! off its search engine perch, and continually frustrated Microsoft's efforts to be a formidable search engine player. Advertisers are embracing what it can give them. That online advertising market is growing at breakneck speed, from over $40 billion in 2007 to nearly $80 billion by 2010.

The big question is whether they can beat Google, or at least increase their advertising share of the pie. Yahoo! has fallen on much tougher times. Eight years ago, its market cap exceeded $100 billion. Last week it fell to less than $26 billion, but it still gets a lot of traffic -- some 2 billion page views a month. According to one analyst, the Yahoo! acquisition could also be an attempt to try to blunt any inroads Google is making in free software applications.

Microsoft has a lot riding on the Yahoo! offer. It's paying a huge premium to try to play catch-up to Google. Many say the battle has already been lost, Google is too far along. Clearly the premium that Microsoft is willing pay for Yahoo! shows they still think there's a lot of potential revenue for them to capture.E-mail to a friend